Convenable Capital Management manages an equity portfolio for the Flender Company. Cash held in the portfolio is invested by the Flender’s existing custodial bank. Must Convenable include cash and cash equivalents in the portfolio return calculations?
C…as it has no discretion…is that right!!!
Unfortunately…C is not correct.
my answer:
A. yes. the ammount of cash that you invest or chose to not invest affects the return of your overall position. eg, a portofolio manager who choses to not invest in ejquity because he think markets are bad and subsequently holds a higher cash position esentially might earn a lower return on the overall position if he is wrong.
C is not correct because it’s not uncommon for a custodial bank to hold cash assets. They will make their assets availabel to the portofolio manager if the purpose for which cash will be used meets investment guidelines, so the equity manager does have some discretion (i.e., he can ask for more cash, so that he can invest it, as long as it meets the investment guidelines).
B is just non-sensical.
A. Cash return must be included in the portfolio return
A - as well. Cash return must be included as it is portfolio manager’s decision to allocate
A. Yes
Response question: Where did you find this question?
Yes. Correct answer is A.
It’s CFAI EOC question.